Friday, November 14, 2014

Yea! Low Gas Prices! Boo! Low Gas Prices!

Most people cheer when the price of gas goes down.  Others are wary.

Being an economist is a cushy job.   Why?  Because whatever you say, you are never wrong.   Two economists can say opposite things about a particular economic issue and both of them are right.   I should have gotten in on that gig!

Take inflation.   One economist can warn that high inflation will wipe out the country.   The second one, in the same economic conditions, will warn that deflation is imminent and will wipe out the country.  Both collect paychecks and go home.  Sweet deal!

The same is true with gas prices.   Gas is down to about $2.75 a gallon, which in historical terms, is pretty low.  It is a lot lower than the over $4 a gallon we were paying this summer.   Most consumers take this as good news, just as they take low inflation as good news.   Some economists think otherwise.  Who's right?

Probably the consumers.   Let me explain.

In the late 1970's, gas prices shot up.  Not only did gas prices shoot up, there were severe shortages.   Gas stations would close because they ran out of gas.   And a Federal Law mandated that you could only buy gas on even or odd days (based on your license plate number).   This was an attempt to put an end to the long lines at gas stations across the country.   And generally, if it was the correct day, the gas station was open, and you had the correct license plate number, you could only buy $10 at a time (which back then was ten gallons).   Life sucked.

In 1980, Reagan took office and it was "morning in America".   Well, not exactly, but during the next decade, gas prices eased somewhat.  And as energy costs declined, well, the cost of doing business declined, and more people went back to work.   It also took a big bite out of inflation, which was running 10% at the time Reagan took office.

The "Reagan Revolution" was fueled by cheap gas.   And when Clinton took office, gas went even further down - to less than a dollar in many places.  The economy took off, and like Reagan, Clinton took credit for it.   At less than a buck-a-gallon, buying something like a motorhome or a big boat made "sense" economically, and people went out and bought these things.   The cost of shipping went down, so the cost of materials to build a house decreased.   Across the board, reduced energy costs fueled the economy, as the cost of anything from shoes to corn is based on the energy used to make, grow, ship, or transport it.

So who was the victim there?   Well, alternative energy, for one.   Back in those days, the government was experimenting with an "Oil Shale" project in Parachute, Colorado.  Wacky far-out stuff, right?  Making oil from shale!  Reagan put a stop to that, right away - and cancelled the project.   Of course, today, we get oil from shale in spades, from the Bakken formation.  Oil sands from Canada produce a lot as well.   But if oil goes below $80 a barrel, these operations will be seen as unprofitable.  It would be cheaper to import oil from the middle-east again, and so we would do it.

Similarly, solar projects and wind projects abounded in the 1980's, and the cost of cheap energy pretty much killed them all off.  Reagan took the solar panels off the white house (the ones that Jimmy Carter had installed) and Americans took the blankets off their hot water heaters.   We lost interest in saving energy when energy became cheap.

Electric cars were all the rage back then.   California actually mandated that all the car makers sell electric cars in their State - and all the car makers geared up to sell them - and actually sold (or leased) many.   But then the mandate was eliminated, and all those GM EV-1's went to the crusher.

Now, stop me if any of this sounds familiar.   Today we are getting oil from oil shale (and oil sands) in the North Dakota and Canada.   Today, we are selling electric cars and putting solar panels on our roofs.  People are putting up "wind farms" to harvest wind energy.   The technology is better this time around, of course.  Electric cars run better and go further.  Solar cells are cheaper and more reliable.   Wind farms are now practical.   Well, practical with a tax subsidy.  And sadly, tax subsidies are driving many of these projects.

Tax subsidies and high oil prices, that is.   What will kill the electric car this time around?  Cheap gas.

Cheap gas is good for us as individuals, but arguably bad for us as a country.   As the price of crude oil plummets, we will buy more and more from those lovely folks in those Middle-Eastern countries - you know the one's who love us all so much!   So once again, we make ourselves dependent on an energy source that is from a volatile region and can be cut off at any time, as they did in 1973.

And if oil prices go low and stay low, there will be massive unemployment in the US energy sector.  The oil shale projects will close up shop and lay off their workers.  The boom towns in North Dakota will turn to ghost towns.   People who paid top dollar for a home up there may end up bankrupt - just like folks in Parachute, Colorado.   The Keystone Pipeline project will end up a financial bust - as no one will be sending any oil from Canada through it, as it will be too expensive.  And our Canadian neighbors will be hurting - and hurting badly - as they no longer have oil sands petroleum to sell us, in order to prop up their socialist State.

If a Republican President is elected in 2016, well you can bet that the new EPA CAFE standards will be loosened.   And yea, people will go right back to buying monster trucks again - and monster SUVs and motorhomes and penis boats.   We will go right back to squandering energy and setting ourselves up for yet another fall, when energy prices skyrocket again, and gas goes to $5 a gallon ($5 a gallon is the new $4 a gallon).

And like clockwork, the local "News Team" will dispatch a news van to the local gas station to interview some Cooter driving a Dodge Ram, and get his "take" on these "crazy gas prices".   "Heck, I can't afford to fill up my truck!" he will remark, "Who could have seen this coming?"  Gee, where have I heard that before?

Who indeed.  It's like housing bubbles.   Who would have seen that coming?  I mean, after the first one, that is....

So enjoy the cheap gas!   But don't fall into a lot of bad habits as a result of it.   Because expensive gas will be right around the corner, probably the day after you sign the loan papers on a Ford Excursion.

And if you live in North Dakota, think hard before "investing" in Real Estate in one of those oil boom towns.